Private market investment in Asia moves centre stage

Given the global macroeconomic environment, institutional investors are enhancing their risk portfolio by investing in private markets opportunities in Asia according to Towers Watson. In the research, entitled Investing in Private Markets, the company examines the potential rewards and challenges of investing in the main emerging markets in Asia, such as China and India.

Naomi Denning, head of investment at Towers Watson in Asia Pacific, said: “While finding genuine skill is far from straightforward and we would encourage caution and selectivity, various geographies in Asia provide interesting macro cases in the longer term. For instance in China, the fundamental economic drivers and the government’s commitment and ability to adjust its policies, have pushed it into the international investing spotlight. India is predicted to overtake Japan as the third-largest economy in the world by 2020. This GDP growth provides a favourable backdrop for private markets investing, however, investors should also aware of implementation difficulties that they might face.”

In the research, Towers Watson introduces the concept of adaptive portfolio management which, compared with a traditional approach, pursues a more thematic and flexible method of constructing a private markets portfolio based on the medium-term outlook for various sectors and regions.

Luba Nikulina, global head of private market research at Towers Watson, said: “We believe a holistic approach with a clear demarcation between alpha and beta strategies can position illiquid private markets portfolios for long-term success. It provides investors with a better platform to select best-in-class opportunities across private equity, opportunistic infrastructure, real estate and distressed assets, and improve the overall risk profile by selecting diversifying, lower-risk alternatives integrated with a fund’s wider investment strategy.”

In the research, Towers Watson explores investors’ increased interest in secondaries and co-investments and gives its view on the future in these and other strategies, such as popular credit-related strategies including distressed debt and mezzanine. In addition, it assesses a number of broader macroeconomic themes that could offer both potential return enhancement and diversification, such as renewable energy, agriculture, timber and natural resources.

Towers Watson also outlines its top five reasons why investors should pay greater attention to investing in private markets:

• Private markets provide investors with exposure to unique market segments that are difficult to access through listed vehicles;
• Investing in private markets provides additional diversification. Many of the assets benefit from low correlation with public stocks or bonds, for example core real estate and infrastructure;
• The range of tools for value creation is more diverse - stemming from an active-ownership model and all the associated benefits a long-term horizon which better withstands periods of volatility;
• There is a meaningful premium paid for illiquidity and investors in private markets (especially in alpha-seeking strategies) should expect higher returns compared with public markets;
• There is often a price discrepancy between valuations for publicly-listed and privately-owned assets, giving flexible investors an on-going opportunity for valuation arbitrage.